Connecticut appears poised to become the next state to raise its minimum wage to $15 per hour, following the trend set by California, Illinois, Massachusetts, New Jersey, New York, and most recently Maryland, in addition to numerous local jurisdictions. Governor Ed Lamont is expected to sign H.B. 5004, which passed the state’s House and Senate earlier this month.

Under the bill, the state’s current minimum wage of $10.10 will increase to $11 on October 1, 2019. From there, it will increase one dollar every eleven months until it reaches $15 on June 1, 2023. Thereafter, increases will be tied to the U.S. Department of Labor’s Employment Cost Index and become effective each year on January 1. The bill includes a provision under which the governor can recommend to the state’s legislature suspension of the increases after two quarters of negative growth in the state’s real gross domestic product.

The bill does not change the tip credit allowed for certain tipped workers, which remains $6.38 for tipped hotel and restaurant staff and $8.23 for bartenders.

Employers may still pay employees under the age of 18 a rate of no less than 85% of the minimum wage when they begin work, but the amount of time this sub-minimum wage is permitted will decrease from the first 200 days of employment to the first 90 days of employment. Additionally, this sub-minimum wage will no longer be available for learners and beginners or for emancipated minors.

On April 29, 2019, the U.S. Department of Labor (“DOL”) issued an opinion letter concluding that workers providing services to customers referred to them through an unidentified virtual marketplace are properly classified as independent contractors under the Fair Labor Standards Act (“FLSA”).

Although the opinion letter is not “binding” authority, the DOL’s guidance should provide support to gig economy businesses defending against claims of independent contractor misclassification under the FLSA. The opinion letter may also be of value to businesses facing other kinds of claims from gig economy workers that are predicated on employee status, such as organizing for collective bargaining purposes.

Overview

An unidentified “virtual marketplace company” – defined by the DOL to include an “online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services” – requested an opinion on whether service providers who utilize the company’s platform to connect with customers are employees or independent contractors under the FLSA.

To answer this question, the DOL analyzed whether, and to what extent, the service providers are “economically dependent” upon the company. Applying what is commonly referred to as the “economic realities test,” the DOL considered the following six factors:

the nature and degree of the putative employer’s control;

the permanency of the relationship;

the level of the worker’s investment in facilities, equipment, or helpers;

the amount of skill, initiative, judgment, or foresight needed;

the worker’s opportunity for profit and loss; and

the extent to which the worker’s services are integrated into the putative employer’s business.

The DOL noted that because status determinations depend upon the “circumstances of the whole activity,” it could not “simply count[] factors” when evaluating the service providers’ independent contractor status. Instead, it needed to weigh the relevant factors to determine whether the service providers are in business for themselves, or economically dependent on the company.

The DOL’s Analysis

The DOL began its analysis by explaining that because the service providers work for customers – and not the virtual marketplace, or the company that maintains it – it was “inherently difficult to conceptualize the service providers’ ‘working relationship’” with the company. The DOL then applied the factors listed above, finding that each weighed in favor of independent contractor status.

Control. The DOL determined that the “control” factor weighed heavily in favor of independent contractor status. In reaching this conclusion, the DOL noted that the service providers – who have the right to accept, reject, or ignore any opportunity offered to them through the platform – control “if, when, where, how, and for whom they will work,” and are not required to complete a minimum number of jobs in order to maintain access to the platform. The DOL also pointed to the service providers’ freedom to work for competitors, and to simultaneously use competing platforms when looking for work. Finally, the DOL found that the service providers are subject to minimal, if any, supervision. Although customers have the ability to rate the service providers’ performance, the company does not inspect the service providers’ work or rate their performance, or otherwise monitor, supervise, or control the details of their work.

Permanence. The DOL found that the lack of permanence in the parties’ relationship weighed strongly in favor of independent contractor status because: (i) the service providers have a “high degree of freedom to exit” the relationship; (ii) the service providers are not restricted from “interacting with competitors” during the course of the parties’ relationship (or after the relationship ends); and (iii) even if the service providers maintain a “lengthy working relationship” with the company, they do so only on a “project-by-project” basis.

Investment. The DOL next concluded that the level of investment favored independent contractor status, reasoning that although the company invests in its platform, it does not invest in facilities, equipment, or helpers on behalf of the service providers, who are responsible for all costs associated with the “necessary resources for their work.”

Skill and Initiative. Although the company did not disclose the specific types of services available to customers through the platform, the DOL concluded that the level of skill and initiative needed to perform the work supported independent contractor status. Regardless of the specific types of work they perform, the service providers “choose between different service opportunities and competing virtual platforms,” “exercise managerial discretion in order to maximize their profits,” and do not receive training from the company.

Opportunity for Profit and Loss. The DOL found that although the company sets default prices, the service providers control the major determinants of profit and loss because they are able to select among different jobs with different prices, accept as many jobs as they see fit, and negotiate with customers over pricing. The DOL also found that the service providers can “further control their profit or loss” by “toggling back and forth between” competing platforms, and determining whether to cancel an accepted job (and incur a cancellation fee) if they find a more lucrative opportunity.

Integration. The DOL concluded that the service providers are not integrated into the company’s business operations because: (i) the service providers do not develop, maintain, or operate the company’s platform; (ii) the company’s business operations effectively terminate at the point of connecting service providers to consumers; and (iii) the company’s “primary purpose” is to provide a referral system to connect service providers with consumers in need of services – not to provide any of those services itself.

The DOL found that these facts “demonstrate economic independence, rather than economic dependence,” and concluded that the service providers are independent contractors under the FLSA.

Takeaways

As noted by the DOL, determining “[w]hether a worker is economically dependent on a potential employer is a fact-specific inquiry that is individualized to each worker.” In addition, the tests for determining independent contractor status vary by statute, and by jurisdiction. Accordingly, agencies in some jurisdictions, including in states that apply the “ABC test” to determine independent contractor status in certain contexts, such as California and New Jersey, may disregard the opinion letter. Indeed, the New Jersey Labor Commissioner recently issued a statement indicating that the opinion letter “has zero effect on how the New Jersey Department of Labor enforces state laws … [because] the statutory three-part test for independent contractor status [in New Jersey] … is distinct from and much more rigorous than the standard referenced in the opinion letter.” Nevertheless, the opinion letter should provide support to gig economy businesses defending against claims of independent contractor misclassification under the FLSA, and in jurisdictions that apply tests that overlap with the FLSA’s economic realities test.

The opinion letter may also be of value to businesses facing other kinds of claims from gig economy workers that are predicated on employee status, such as organizing for collective bargaining purposes. Earlier this year, the National Labor Relations Board (“NLRB” or “Board”) adopted a new test to be used in distinguishing between “employees,” who have rights under the National Labor Relations Act (“NLRA” or “Act”) and independent contractors who do not. In its January 25, 2019 decision in SuperShuttle DFW, Inc., 367 NLRB No.75 (2019) the Board rejected the test adopted in 2014 in FedEx Home Delivery, 361 NLRB 610 (2014) and returned to the common-law test, finding that the test adopted in FedEx minimized the significance of a worker’s entrepreneurial opportunity.

SuperShuttle involved a union petition for an election among a group of franchisees operating SuperShuttle airport vans at Dallas-Fort Worth Airport. In response to the petition, SuperShuttle, the franchisor, argued that the franchisees who were seeking representation were not employees but rather independent contractors and as such were not entitled to vote in an NLRB election or to exercise the rights granted to employees, but not independent contractors, under the Act. The Board found that the franchisees’ leasing or ownership of their work vans, their method of compensation, and their nearly unfettered control over their daily work schedules and working conditions provided the franchisees with significant entrepreneurial opportunity for economic gain. These factors, along with the absence of supervision and the parties’ understanding that the franchisees are independent contractors, resulted in the Board’s finding that the franchisees are not employees under the Act. While the tests for determining independent contractor status under the NLRA and FLSA differ, both the Board’s decision in SuperShuttle and the DOL’s opinion letter emphasize similar themes, including the significance of a worker’s economic opportunity and discretion.

In April 2018, the California Supreme Court issued its long-awaited opinion in Dynamex Operations West, Inc. v. Superior Court, dramatically changing the standard for determining whether workers in California should be classified as employees or as independent contractors for purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”). In so doing, the Court held that there is a presumption that individuals are employees, and that an entity classifying an individual as an independent contractor bears the burden of establishing that such a classification is proper under the “ABC test” used in some other jurisdictions.

Specifically, the ”ABC” test requires the hiring entity to establish each of the following three factors:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Understandably, in response to Dynamex, many employers reviewed their practices relating to independent contractors to confirm whether they satisfied the new “ABC” test.

And, just as understandably, employers were concerned about whether Dynamex would apply retroactively.

The Ninth Circuit has now addressed that issue and has concluded that Dynamex in fact applies retroactively.

In Vazquez v. Jan-Pro Franchising International, Inc., the defendant – an international janitorial cleaning business — was awarded summary judgment on minimum wage and overtime claims stemming from allegations that janitors had been misclassified as independent contractors as part of its “three-tier” franchising model. The plaintiffs appealed, and the Dynamex decision was issued while the case was on appeal. The Ninth Circuit ordered the parties to brief the effect of that decision on the merits of the case.

The defendant devoted most of its supplemental briefing to arguing that Dynamex did not apply retroactively. The Ninth Circuit disagreed, concluding that it in fact applies retroactively largely because the Dynamex Court stated it was merely “clarifying” existing law rather than departing from it, and remanded the case to the district court for further proceedings in which the new “ABC” test is to be applied retroactively.

Barring a dramatic development, such as a reversal by the United States Supreme Court, this decision should be of great concern to any entity that retained workers as independent contractors prior to Dynamex. Those entities may now be exposed to litigation for failing to comply with an “ABC” test that they had no reason to believe they needed to comply with for the simple reason that it did not even exist.

Internship programs can help employers source and develop talent, but they do not come without their pitfalls. If you are an employer at a tech startup, a large financial institution, a fashion house, or something else entirely, and you plan on having interns this summer, this webinar is for you. Learn the steps for creating a legally compliant internship program.

For many years, the U.S. Department of Labor (“DOL”) used the “six-factor test” when determining whether an employee was legally considered an unpaid intern, such that the intern would not be subject to the wage and hour requirements of the Fair Labor Standards Act. This changed at the beginning of 2018, when the DOL adopted the “primary beneficiary test” in a move allowing increased flexibility for employers and greater opportunity for unpaid interns to gain valuable industry experience. Employers that fail to follow the requirements to ensure that an intern is properly treated as an unpaid intern, rather than an employee who is entitled to minimum wages and overtime, could face costly wage and hour litigation.

Our colleagues Jeffrey M. Landes, Lauri F. Rasnick, and Ann Knuckles Mahoney guide viewers on how they can establish lawful unpaid internship programs. This webinar also addresses the extent to which wage and hour laws apply to interns, and the seven factors that make up the “primary beneficiary test.” This webinar provides viewers practical tips for administering an internship program, whether paid or unpaid, by identifying key considerations for all stages of the internship process.

In a 5-4 opinion (divided on expected conservative/liberal lines), authored by the Chief Justice, the Supreme Court has ruled in the case of Lamps Plus, Inc. v. Varella, No. 17-988, that under the Federal Arbitration Act (“FAA”), an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.

This reverses the decision of the Ninth Circuit concerning a case relating to the unauthorized disclosure of personal tax information of employees of Lamps Plus after a hacker tricked an employee into divulging that information. The Supreme Court had held in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, that a court may not compel class-wide arbitration when an agreement is silent on the availability of such arbitration. Lamps Plusextends that holding to agreements that are ambiguous. In so doing, the Court’s majority stressed the FAA mandate that arbitration is a matter of consent, and is yet another example of the conservative majority of the Court, led particularly by Chief Justice Roberts, acting to limit the flow of employment and commercial disputes into the federal courts by strongly enforcing the FAA against various policy arguments made by labor unions and other employee groups and organizations on the jurisprudential left. See most recently Epic Systems Corp. v. Lewis, 584 U. S. ___ (2018). …

On April 12, 2019, in a federal case known as Hamilton v Wal-Mart Stores, Inc., a California jury awarded more than $6 million in meal break premiums to a class of Wal-Mart employees who worked at the company’s fulfillment center in Chino, California. The jury found that by requiring class members to complete a mandatory security check prior to leaving the facility, Wal-Mart discouraged them from leaving the premises for meal breaks, failing to comply with its obligation to provide class members with required meal breaks. The verdict – which Wal-Mart may well appeal – provides guidance to employers doing business in California.

Background

In the lawsuit, the plaintiffs alleged that the company violated California law by, among other things: (i) requiring class members to complete a mandatory security check when leaving the facility, which allegedly infringed on their 30-minute meal periods (the “Meal Period Interruption Theory”), and discouraged them from leaving the premises during meal breaks (the “Meal Period Discouragement Theory”); (ii) failing to compensate class members for time spent walking to the security checkpoint, waiting in line, and passing through security, which allegedly resulted in unpaid wages and overtime (the “Off-The-Clock Theory”); (iii) failing to properly pay overtime to class members who worked alternative workweek schedules; (iv) failing to pay all wages due upon separation of employment; and (v) failing to provide accurate wage statements.

The Court certified several subclasses associated with these claims in August 2018. However, in March 2019, the Court decertified subclasses associated with the plaintiffs’ Meal Period Interruption and Off-The-Clock Theories.

Both sides unsuccessfully moved for partial summary judgment prior to trial. In denying the portion of Wal-Mart’s motion that addressed the plaintiffs’ Meal Period Discouragement Theory, the Court rejected the notion that the California Supreme Court’s decision in Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004 (2012), prohibits “employers only from preventing employees from taking a meal break.” Instead, the Court held that “California law imposes an affirmative obligation on employers to provide employees with meal breaks.”[1] The Court further found that Wal-Mart’s mandatory security check “arguably ‘impedes or discourages’ associates from taking an ‘uninterrupted 30-minute break’ because employees have only two options: leave the premises and go through the security check even though the security check may eat up some part of their meal break or stay inside the facility.” The parties proceeded to trial on this issue, and the other surviving claims, on April 3, 2019.

The Verdict

The jury returned its verdict on April 12, 2019. Although the jury found that Wal-Mart had satisfied its obligations with respect to paying overtime to class members on alternative workweek schedules, it awarded more than $6 million to the class in meal break premiums pursuant to the plaintiffs’ Meal Period Discouragement Theory. The jury found that by requiring class members to complete the mandatory security check prior to leaving the facility, which discouraged them from leaving the premises for lunch, Wal-Mart failed to meet its obligation to provide class members with required meal breaks.

Takeaways

Unless the verdict is overturned on appeal, as it may be, this verdict sheds light on the scope of an employer’s obligation to “provide” meal breaks under Brinker, and on how juries might apply the law to unique fact patterns, including those involving security checks and other practices that could potentially dissuade employees from leaving their worksite for meal periods. The award also serves as a reminder to employers with operations in California to take a holistic approach when evaluating compliance with wage and hour laws. Even practices that might appear to have little or no bearing on an employee’s working hours, compensation, or break time may indirectly create significant exposure under the law.

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[1] In Brinker, the California Supreme Court held that an employer satisfies its obligation to provide meal breaks “if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.” 53 Cal. 4th at 1040.

The Acting Administrator of the U.S. Department of Labor’s Wage and Hour Division recently issued opinion letters addressing (i) the 8-and-80 overtime pay system available to certain healthcare employers; (ii) the overtime exemption for teachers, and (iii) the exemption for employees in agriculture. The analyses and conclusions in those opinion letters are instructive for employers not only in those industries, but in many other industries as well, because they confirm the Department’s commitment to construing FLSA exemptions fairly rather than narrowly.

“8 and 80” Overtime

The first opinion letter, FLSA2019-3 (Apr. 2, 2019), addresses whether the “8 and 80” method of computing overtime is available to a private, 24-hour youth residential care facility that accepts adolescents placed there by county child services bureaus.

In addition to the general provision for overtime after 40 hours in a seven-day workweek, section 7(j) of the FLSA allows an alternative overtime calculation for certain health employers. Known as the “8 and 80” method, this alternative allows “a hospital or an establishment which is an institution primarily engaged in the care of the sick, the aged, or the mentally ill . . . who reside on the premises” to enter into agreements with employees to pay overtime for hours in excess of 8 hours in a workday or 80 hours in a 14-day work period.

The Acting Administrator explained that, in addition to hospitals, section 7(j) is available to a residential care institution that meets any of the following criteria:

deriving more that 50 percent of its income from providing “domiciliary care to individuals who reside on the premises” in order to receive care “of a less critical nature than that provided by a hospital”;

providing care for residents, the majority of whom obtain admission by a qualified physician, psychiatrist, or psychologist; or

retaining a qualified physician, psychiatrist, or psychologist who regularly provides therapy to more than 50 percent of the residents.

The letter states that the Wage and Hour Division does not have sufficient information to determine whether the facility described in the request for the opinion letter qualifies under section 7(j), and it refers the requester to these standards to evaluate the availability of the 8 and 80 method.

The Overtime Exemption for Teachers

The second recent opinion letter, FLSA2019-4 (Apr. 2, 2019), considers whether “Nutritional Outreach Instructors” at a public university are subject to the FLSA’s exemption for teachers.

The teachers addressed in the letter are part of the university’s Extension Service Department and teach classes on healthy nutrition and cooking techniques. The position requires a high school diploma or GED. These classes are open to the public, and they place in locations such as community centers, churches, and homes.

After setting forth the statutory language applicable to teachers, the letter turns to the United States Supreme Court’s 2018 decision in Encino Motorcars, LLC v. Navarro, in which the Court rejected the longstanding rule of narrowly construing FLSA exemptions to effectuate the statute’s remedial purpose, in favor of giving exemptions a “fair (rather than narrow) interpretation[.]” The letter notes that the Wage and Hour Division now applies this “fair reading” standard to interpreting exemptions.

The FLSA’s regulations provide that an employee is an exempt teacher if his or her primary duty is “teaching, tutoring, instructing or lecturing in the activity of imparting knowledge” while employed in an “educational establishment.” The letter notes that an educational establishment is any form of public or private educational institution and that “[t]he teacher exemption has no minimum education or academic degree requirement.” Furthermore, because the regulations do not restrict where a teacher may teach, an employee who teaches online or remotely may qualify for the teacher exemption.

The Acting Administrator determined that because the primary duty of the Nutritional Outreach Instructors is teaching, and because they do so for an educational institution, the Instructors qualify as exempt teachers.

The Agricultural Exemption

Finally, in FLSA2019-5 (Apr. 2, 2019), the Wage and Hour Division addresses whether the exemption from overtime pay for employees in agriculture extends to a farm’s “light processing” activities—i.e., cutting or freezing its own agricultural products—and to packing, storing, and delivering those products.

As in the letter regarding teachers (and an August 2018 opinion letter), the Acting Administrator again cites Encino Motorcars for the requirement to construe FLSA exemptions “fairly” rather than narrowly.

The letter then notes that the exemption for agriculture extends to farming (known as “primary agriculture”) as well as activities performed by a farmer or on a farm in conjunction with such farming operations (known as “secondary agriculture”). An activity qualifies as secondary agriculture only if it (1) is more akin to agriculture than manufacturing, (2) is subordinate to the farming operations involved, and (3) does not amount to an independent business.

The letter states that the Wage and Hour Division lacks information sufficient to determine whether the exemption applies in this instance. However, it notes that the activities are likely to be secondary agriculture if the farm’s activities of cutting or freezing its own fruit, vegetables, or meat do not amount to an independent business, and the farm’s employees perform any delivery involving travel off of the farm.

Conclusion

The new batch of opinion letters provides a useful overview of the 8 and 80 method of computing overtime, as well as the exemptions for teachers and agricultural employees.

More broadly, although many past Wage and Hour Division opinion letters stated that exemptions from minimum wage and overtime requirements under the FLSA “are to be narrowly construed against the employers seeking to assert them,” it is now clear that the Wage and Hour Division views that principle as supplanted by the rule in Encino Motorcars requiring the “fair” reading of exemptions.

In the first meaningful revision of its joint employer regulations in over 60 years, on Monday, April 1, 2019 the Department of Labor (“DOL”) proposed a new rule establishing a four-part test to determine whether a person or company will be deemed to be the joint employer of persons employed by another employer. Joint employer status confers joint and several liability with the primary employer and any other joint employers for all wages due to the employee under the Fair Labor Standards Act (“FLSA”), and it’s often a point of dispute when an employee lodges claims for unpaid wages or overtime.

Under current DOL regulations, two or more employers acting entirely independently of each other may be deemed joint employers if they are “not completely disassociated” with respect to the employment of an employee who performs work for more than one employer in a workweek. In its proposal – a sharp departure from earlier Obama-era proposals to broaden the test for determining joint employer status to one based on economic realities – the DOL seeks to abandon the “not completely disassociated” test and has proposed to replace it with a four-part balancing test derived from Bonnette v. California Health & Welfare Agency, a 1983 decision by the Ninth Circuit Court of Appeals. …

On March 22, 2019, we wrote that the two houses of the Maryland General Assembly had agreed on a conference report adopting the Senate’s version of a bill that would increase the state-wide minimum wage to $15 by 2025 or 2026, depending on the size of the company, with two minor changes. We also discussed the bill on March 18, 2019.

As we predicted, Governor Hogan vetoed the bill on March 27, but the General Assembly on March 28, 2019 voted to override the veto. This means the first increase in the state-wide minimum wage will be on January 1, 2020, from $10.10 to $11 for all employers.